This Is How to Make Money in 2020

Tuesday, 7 January 2020
Melbourne, Australia
By Murray Dawes

The only thing happening in finance is the reaction to Trump’s order to kill Iranian General Soleimani.

The expected knee jerk reaction in gold and oil has happened and now everyone is waiting to see what comes next.

I have seen many geopolitical events come and go over the last few decades and the usual outcome is that markets gyrate wildly for a while and then settle back down to business as usual.

If Iran decides to sink a few oil tankers in the Strait of Hormuz then we’d likely see another leg higher in oil and gold, but I can’t imagine that would be their next move.

Gold has enough reasons to trade higher anyway, so the recent breakout may be maintained. Both oil and gold confirmed a monthly buy pivot at the end of last year. Until we see a monthly sell pivot, I’m happy to remain bullish on both.

If you have a similar view and you are thinking about ways to make money trading oil and gold, what process do you follow before entering a position?

Do you have a set process that you follow? Or do you chat to your broker and do whatever they say?

If you looked at a list of potential gold stocks to buy how do you choose between them? Do you buy them all? Pick a few at random? Buy the one with the strongest looking chart?

Once you’re in, how do you decide when you’re wrong and should get out? When do you take profit?

If you are flying by the seat of your pants then all I can say to you is stop.

Stop and think long and hard about why you do what you do. Every decision you make when entering the market can end up costing you plenty. The cockier you get the more dangerous you are if you don’t follow a defined process.

We are our own worst enemy when trading the markets. The ego can’t help but get caught up in the ebb and flow of price action. We tell everyone who will listen how great our last trade was if we made money. We don’t tell a soul about the big loss.

If you see your P+L as a reflection of how clever or silly you are, you will end up following the same path that all novice traders take. The cycle of euphoric trading to kamikaze trading.

Before we delve any further, let’s take a look at the markets…

Markets

Overnight, the Dow Jones Industrial Average closed up 68.50 points, or 0.24%.

The S&P 500 closed up 11.43 points, or 0.35%.

In Europe the Euro Stoxx 50 index closed down 20.85 points, or 0.55%. Meanwhile, the FTSE 100 lost 0.62%, and Germany’s DAX closed down 92.15 points, or 0.70%.

In Asian markets Japan’s Nikkei 225 is up 33.47 points or 1.34%. China’s CSI 300 is up 0.45%.

The S&P/ASX 200 is up 84.30 points, or 1.25%.

West Texas Intermediate crude oil is US$62.50 per barrel. Brent crude is US$68.04 per barrel.

Turning to gold, the yellow metal is trading for US$1,559.13 (AU$2,247.97) per troy ounce. Silver is US$18.03 (AU$26.00) per troy ounce.

One bitcoin is worth US$7,875.01.

The Aussie dollar is worth 69.35 US cents.

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As your P+L increases, your confidence starts to build and you convince yourself that you have got the hang of this trading thing. Your position size starts to increase and your profits start to flow as well. You feel six-foot-tall and bullet proof.

A position then starts to go south and you hold onto it because your P+L is up so much that you know you can easily handle it. You’re such a good trader that you feel certain it will turn back up again.

We all know what happens next. The loss then multiplies, and you watch in horror as you lose five times as much as you expected.

The loss is now so big that you are not willing to take it. You decide to wait for it to bounce a bit before getting out, so you don’t have to take such a big loss.

Yes, you guessed it. The stock keeps falling and you end up dumping the stock in a panic once you have lost 10 times as much as you were initially prepared to lose.

Your overall P+L has been dented in a big way and your confidence is shaken.

That part of the process was the euphoric trading.

Then comes the kamikaze trading.

You tell yourself that you won’t be silly enough to do such a thing again and you rationalise it as a lesson well learnt.

You want to get back on the horse quickly and trade a few larger positions so that you can swiftly make back the money that you lost on that trade.

Things start going from bad to worse. Loss after loss starts piling up and you keep reminding yourself that if you just keep plugging away things will turn around. But they don’t. You start listening to tips at the pub because you have lost all confidence in your own trading.

You don’t even notice that your P+L is now in negative territory. You deliberately don’t look at your P+L because you know it will be bad and you don’t want to make yourself feel worse.

The process will keep going until you finally take a big loss and realise that you are totally out of control and need to stop.

You blame the rigged market and the High Frequency Traders and look at the stocks that bounced just after you got out and can’t believe how unlucky you are.

But it has nothing to do with luck. It has everything to do with not understanding why you do what you do.

I am constantly amazed that people will devote years learning how to be a doctor but then will start trading the financial markets without having a clue what they are doing. They assume their intelligence is so great and they have so much money that they will be successful.

Being successful in one area of life gives you no guarantees that you will be successful trading the markets. If anything, it is probably a hindrance.

It takes years of trial and error, self-reflection and perseverance to make it into the top few percent of people that can make money trading the markets consistently.

If you have the time and inclination to travel that road then you need to buckle yourself in for a wild ride.

My advice is to jump the queue and learn from people who have already beaten their own path and are willing to show you the way.

I do an immense amount of work before I am willing to enter any stock. I would prefer to sit on my hands than take a mediocre trade. I have lost all interest in the excitement of pressing the button to trade.

I want to give you an outline of my trading process so you can compare it to your own method for entering stocks and see whether you can improve your own decision-making.

My first step is to run a scan of the whole market every month and quarter based on a formula I have written looking for my technical set up.

The scan will usually give me about 100 stocks that have potential.

I look at each chart and get rid of the ones that don’t stack up to other technical criteria that can’t be put into a formula.

That usually leaves me with about 30–50 stocks.

I then go through each stock with my fundamental analysis, reading past reports and contacting people in the industry to get recent research. I focus on TAM (total addressable market), balance sheet strength, cash flow, debt, top 20 holders, intellectual property, upcoming catalysts, sectoral analysis and relative strength to other stocks in the sector. I also look closely at remuneration for insiders to judge whether management interests are aligned with shareholders.

Once I have done that I usually have about 5–10 stocks that are ready to be bought or sold short. But I have to wait until I get the final technical signal to get in that will give me the best risk/reward on the trade and the ability to take part profit quickly. I may only get that signal in one or two of the stocks.

It’s a huge amount of work for one or two trades.

In Alpha Wave Trader last year, I only sent out 19 trades in stocks. That’s one trade about every three weeks. But we only had three losses over the whole year and the average return on the winners was 35%.

Less is more when trading the markets.

Do lots of work before you enter a trade and be sure that ALL the boxes you want ticked are ticked. Don’t bother trading if you have 80% of the boxes ticked.

Give the trade room to move. Don’t try to make pennies, because the High Frequency Traders will eat you up for dinner. Make sure your stop-loss is at a point where you are proven wrong without a shadow of a doubt.

Take part profit quickly and become free carried. Then sit back and enjoy the show.

Regards,

Murray Dawes,
Editor, Alpha Wave Trader